Sanoma Oyj (SANOMA) Earnings Call Transcript & Summary

Good morning, everyone, and warm welcome to Sanoma's Full Year Result '22 Presentation. My name is Kaisa Uurasmaa. I'm heading Investor Relations and Sustainability at Sanoma. And today, we have the President and CEO, Susan Duinhoven; and CFO, Alex Green, who will present the results. After the presentation, we will have a Q&A session. And we will first take questions from the telephone line, and then we'll hand over to the audience here at Sanoma House. This event will be recorded. The recording will be available on our website soon after the end of the event. With this short introduction, I will hand over to Susan to kick off the presentation, please.

Thank you very much, Kaisa. And good morning to you all, and a warm welcome also from my end to this full year results presentation of 2022. In 2022, we still managed to grow our sales. And even though the operational EBIT was affected by inflation, we consider this a solid year in the business. If we look at the summary of the financials, we see EUR 1.3 billion in sales, up from EUR 1.25 million last year, and that was mainly driven by the acquisition of the Italian and the German business; some organic sales growth, specifically in Learning of 1%; and stable sales in Media Finland. If we then look at the operational EBIT, excluding PPA, that declined due to the extremely challenging operational environment. We saw higher operating costs, especially paper cost increase across the businesses, but that was partially mitigated by thoughtful cost management. Overall, also in Media Finland, we saw a change in sales mix, and that meant that lower advertising sales, which is typically high-margin was replaced by higher event sales, and that also impacted the operational EBIT. At the end of the year, the operational EBIT margin landed on 14.6%, and that was within the pre-war guidance that we had given. If we then look at the free cash flow, EUR 112 million, down from last year due to the earnings impact, on the one hand, but also higher investment costs and costs related to remodeling our offices and cost of recent acquisitions. And quite a number of those investments we had already indicated at the start of the year. This was, to a large extent, mitigated through the working capital that came with the Italian business. At the year-end, we had a leverage of 3.2 due to the higher debt of the Italian and German acquisition that we did close to end of August. So slightly above, as you would expect, our long-term targets, so recently after and closing the acquisition. Then the Board proposed a reduced dividend of EUR 0.37, and that corresponds to 93% of the underlying free cash flow. And the outlook, I will go into more detail later on. You see on this slide as well. If we then look -- that was sort of the financial summary. If we then look at the business summary, we had a solid year from performance in both of the businesses. We see 2022 being another year of growth in our education business. The acquired Italian and German business already had, even in those last 4 months, a positive impact on earnings and specifically on the cash flow contribution. But also Spain. If you remember, first year of the large curriculum renewal, the LOMLOE, it went a bit more fragmented than we had anticipated at the start of the year. But nevertheless, we saw solid sales growth in the Spanish market, good performance. And we also completed a successful integration of the Spanish business. And by now, all the temporary service agreements have been closed. We see then with these acquisitions, both the Spanish and the Italian, we see an increased scale and, therefore, increased opportunity for harmonization of our digital platforms. We spent quite a bit of time and energy on that already in '22, and we will continue doing so in the coming years. And that gives opportunity for future operational benefits in that learning business, the scale now of being such a large leader in K12 in Europe. But also in Media Finland, very good solid steps were made along our strategic path of increasing digitalization. We saw a very clear increase in the number of visits in our digital news platforms and also solid growth both in Helsingin Sanomat but also in the regional titles in digital subscriptions. But not only the news and feature increased its digitalization. You also see that on the entertainment side. And there Ruutu+, the VOD service, the video-on-demand service of Media Finland, showed growing net sales and increasing paying subscribers, which was a positive trend post COVID, where we had actually expected that we would suffer a little bit from a post-COVID discontinuation of that growth. But very solid continued performance in the media business. And then on sustainability, the ESG ratings further improved in 2022. And we clearly see that where sustainability is, of course, very intrinsic to the Sanoma business. We see that improved reporting and improved clarity on the strategy leads to increased ratings. And ISS, for example, rates as now Prime C+, and CDP gives us an A- rating, which are truly industry top performance. And that then also led to NASDAQ Helsinki Sustainability Index inclusion in December '22. So overall, sustainability, strong performance, and we're particularly glad that also our Employee Experience Index, again, stayed strong in what was a more difficult year for our teams. So we stayed at 7.3, clearly above the European benchmark of 7.1. And in 2022, we also indicated our growth ambition. We indicated that we want to be over EUR 2 billion by 2030, so in the longer term. And at least 70% -- 75% of that business is then learning business. And that basically means that we are aiming to double the size of our learning business by 2030. But let me now go into a bit more detail in each of the 2 businesses' performance over 2022, starting with Learning. As said, we saw their net sales growing to EUR 681 million, and that was predominantly due to the acquisition of the Italian business. The organic growth in the overall learning business was 1%. And the strongest growth of that was in Spain and in the Netherlands. And in Spain, it was logical. It was a consequence of the curriculum renewal, large renewal in that market. And even though it went a little bit more fragmented and will continue in '22 and '23 -- sorry, in '23 and '24, we still saw a good uplift in Spanish revenues. In the Netherlands, the growth was really due to the market demand growth where, post COVID, the schools wanted to make sure that students would not lose out from these 2 years of off and on in-school and at-home teaching. So they acquired more high-quality method, but also the good performance of our Muhlenberg team in the Dutch market made that they had substantial share gains in their business. All the other content businesses also grew, and even the Dutch distribution business had modest growth. But then the expected decline was in Poland because in Poland, the curriculum renewal ended in 2021. And as you typically have in a learning business, after such a big renewal, then the year after, the sales drops quite significantly. And with that, we then saw the earnings being stable. And that at EUR 132 million, the acquired Italian business had already a EUR 5 million positive impact. So without that, we saw a slight decline in the other businesses. And that came from the Polish business, where, of course, the decrease in sales was then followed also by a decrease in earnings and partially compensated by the other content businesses, which grew and had improved EBIT. So we saw within the portfolio, the Polish business going more down than the other businesses going up. And the reason why the other businesses didn't go up that much was the inflationary cost and specifically paper. If you think about the whole of the group, the paper cost increased with EUR 15 million. And that meant in Learning, about EUR 7 million higher cost just for doing exactly the same as the year before. So that had significant adverse impact on our earnings. And overall, the inflation in the markets in which we operate, if you think about Poland, Belgium, the Dutch market, high-inflation countries, and it will take 1 to 2 years before we have increased the prices to such a level that it compensates those costs. Last year, it's good to realize that we were not able to increase the prices significantly because they had already been set at the start of the year. So what I would call pre-war, and therefore, 2023 will be the first year that we see, in the learning business, a benefit of increased prices. But what made a change -- and we already discussed this in the third quarter, what made the change to the year was the Dutch distribution business making a loss. And we have explained that after the Q3, it was a combination of inflationary cost pressures but specifically also high shortage of labor in the summer period when that business needs to do the peak of its activities, combined then with late deliveries of one of the main publishers for that business and in the Dutch market. So those pressures in Q3 meant that it was loss-making, even though we recovered and made a first step to improvement already in Q4, partially due to the late deliveries coming out of the high season. So that made Q4 a little bit stronger than you typically would see. So that's overall Learning. So growth, through the acquisition, improved profitability throughout the businesses but modestly and then the Polish business going through its normal reduction after a strong curriculum change. If we then look at Media Finland. There, net sales remained stable, EUR 618 million, but the mix of the sales was quite different. We saw lower advertising sales, and there, within that portfolio, you also see that digital and radio still grows and print and TV declines. So that mix within advertising is also changing. Subscription sales were stable, with digital subscriptions continuing to grow and the print declining. That's also a trend that we've seen for the last year and is part of our strategy. But what we did see that even though the absolute number of sales was stable, the mix different. So lower advertising, which is typically high-margin and then more events and printing services sales, which is typically lower-margin. So that explains why the earnings in Media Finland were lower than last year with EUR 66 million. And that is this mix advertising sales declining being compensated by lower margin and on top the EUR 8 million higher paper cost that had a significant impact, of course, on the cost level of the business, even though the team did very good an early start already on fixed cost reductions being very prudent in their cost levels also in their paper use. So team has done a very good job in mitigating this to the maximum but slightly lower EBIT. So that concludes the 2 deep dives. And then the conclusion from that results then also in free cash flow that was lower in 2022. Underlying business, if you look at this chart, and Alex will go into a bit more detail on this, but our reported total free cash flow of EUR 112 million was significantly helped by the acquisition from the working capital with the Italian business. So when you acquire a business at the end of high season, you, of course, get the average working capital with the business and some cash on the balance sheet that you actually pay for. So due to the timing, there was quite an inflow of working capital. But that working capital, we will need to bring the Italian business through the first half of this year before their high season. So that is something that when we then look at dividend and our calculation for dividend, we typically, and also in the past years, have corrected for the -- what we think unjustified VAT claim that we have prepaid also last year. So we add that for the dividend calculation, but we subtract from the EUR 112 million. We subtract the operational cash flow that came with the Italian business. If we then look forward to 2023 and think about cash flows, it is also important to realize that with an increasing scale of our learning business, the swings in the year, so the seasonality between the quarters of our cash consumption does change significantly. And that means that the Q1 becomes more and more loss-making just like the Q4 and the Q2 is also still quite negative on the cash flow generation, but the Q3 then becomes much higher. So the swings over the year become bigger. And that then also translates in the Board's proposal for the dividend. The Board proposes a reduced dividend of EUR 0.37, and the Board tries to strike -- in that recommendation to the AGM, tries to strike the right balance between capital use for dividend and capital use for continuing investments in the business to grow our digital platforms and our learning content. This dividend still represents EUR 60 million in payments to the shareholders, a payout of slightly above 90% of the underlying free cash flow, and it represents a yield of close to 4% of the year-end 2022 share price. In order to accommodate what I just explained that increasing seasonality in our free cash flow during the year, we proposed to split -- the Board proposed to split the dividend in 3 parts: one part end of April, EUR 0.13; then EUR 0.13 early September; and the final EUR 0.11 late October. And that is late October record date and payment in November. The dividend policy will remain unchanged. It aims to pay an increasing dividend, 40% to 60% of the annual free cash flow. But it will also remain that the Board always takes into consideration the economic environment, the capital structure, the investment needs of the business as well as the underlying cash flow in its recommendation to the AGM. So with that, rounding off the 2022 and then going to look forward to 2023. In 2023, we will continue to build our business and the long-term strength of this business. We've split this into 2 parts, the 2 different businesses to give a bit more detail. If we look at the learning business, there you see that we expect continued organic growth. And the logic there is the Spanish new curriculum. The second phase of the implementation will be this year. And in addition, Poland will be returning to growth because they start with a small renewal in some of the parts of the curriculum. So organic growth -- and then the additional focus will be on the successful integration of the Italian business. We have started that project, started well. We're very happy with the team there, but it is a long and heavy project. We indicated this is 1.5-year project. So it will take all of 2023 to be busy integrating processes and systems. In the business, we do expect that increasing cost levels will impact the profitability. And the impact comes from a slight increase still in paper cost, but specifically, on personnel, we will see an increase. And we need to remember that we're in countries with high -- where the inflation last year was very high. And the salary increases are typically at the start of the year or in the first quarter. And therefore, the salary increases of last year were only reflecting the very modest inflation of the year before. So 2023 is the first year that we will see significant request for salary improvement. And therefore, we estimate that in Learning, it will take 1 to 2 years to mitigate those cost increases through the prices because we are predominantly government-run and the government is our customer, and they can handle 5%, 6% price increase but not the double-digit increases that the inflation would warrant. So that will take 1 to 2 years from now. We will continue our investments in the digital platforms, in the content. We see this as a highly attractive business, and we see our scale is also our future asset to, over time, improve our margins. So if we look at 2023, then we see organic growth and higher operational EBIT coming from the inclusion of the acquisition then for the full year. In the long term, we stick to our long-term target for Learning. Organic growth, 2% to 5% and an operational EBIT margin, excluding PPA, to be above 23%. And we see that growth in margin coming from our scale and our excellent working practices to then also roll out across these larger businesses that we have recently acquired. If we look at Media Finland then. There, we're expecting a mild recession in Finland to impact both the advertising revenue with a slight decline there in a declining market. Even though the digital component within that mix will improve, but we also expect a weakening B2C demand. And that is due to lower consumer confidence, and we will need to be quite careful in using the price elasticity and quite careful in how to price our products because we are in this business for the long term. And we want to make sure that we can provide everyone with high-quality products, both on the news side and on the entertainment side. We will, therefore, have continued focus for our process improvements and very much continue with the thoughtful cost management that the management team in Media Finland has already exhibited for years. So they will continue to be focused on that, improve their ways of working in order to mitigate those inflationary cost impact. So if we look at Media Finland to 2023, we see modest net sales decline due to the recession but a significant impact of inflation on the overall operational EBIT. And there, from an order of magnitude perspective, you need to think that we expect to lose about 1/3 of our profitability in 2023 in Media Finland. Long term, we do see also for Media Finland, the long-term targets still to hold. We know the media business is a fluctuating business. The long-term target of stable revenues and then an operational EBIT margin, 12% to 14%, that comes from increasing digitalization, and that increasing digitalization, we only see going faster due to these inflationary pressures on paper and distribution. So we see that the trend faster to digital actually supported by the trends in the market that will give us temporarily a decline in our profitability, but our long-term target stays in place. So the outlook for 2023, when we then look for the whole of the group, we see the reported net sales will be EUR 1.35 billion to EUR 1.4 billion, going up from the EUR 1.3 billion last year. And the group's operational EBIT, excluding PPA, is expected to be between EUR 150 million and EUR 180 million, coming from EUR 189 million last year. For this outlook, the assumptions that we have put underneath it from an operating environment perspective are that in most of the operating companies that we -- operating countries in which we operate and, particularly, in Finland, there will be a mild recession. And the advertising market in Finland is expected to decline slightly, with most of the decline during the first half of the year. So we expect that the second half of the year will already show a slight improvement. If we then look at our growth ambition that we have set out for 2030. We clearly aim to be above EUR 2 billion as a group, with 75% of our business coming out of Learning. The key drivers for that are the organic growth in line with our long-term targets in Learning and the stable revenues in Media Finland. In Learning, we will focus in the coming year when we're very much also busy with the integration of the Italian business. We will focus on in-market acquisitions in the short term, highly synergetic in markets that we are familiar with while we always stay open for all value-creating M&A opportunities if they arise. Our long-term targets for the SBUs, as I have explained, are unchanged, and also, our long-term financial targets for the group are unchanged. Net debt of an EBITDA below 3, that might take, of course, a bit of time. Equity ratio, 35% to 45%, but these targets are in place. So all in all, with that, I would like to conclude my part of the presentation and hand over to Alex to give a bit more details on the financials. Alex?

Thank you very much, Susan. Thank you, Susan. Welcome here. It's great to be with you for this presentation. I will start off with operation or EBIT, and this is, remember, for Q4 2022. And we had an improvement in operational EBIT versus last year whilst you remember that this is always seasonally negative due to the seasonality of the learning business. So the operational EBIT went from minus EUR 5 million last year to minus EUR 2 million this year. And Learning contributed to that, with a solid performance in most learning content markets but also an improvement in the Dutch distribution business due to delayed deliveries from Q3. These positives offset the impact of the -- including the Italian and German businesses, which is learning businesses are also seasonally negative and obviously weren't included in the previous year. On the Media Finland side, we had savings in fixed costs and lower personnel expenses due to full year incentive adjustments, but this was offset by the lower advertising sales, with the declining advertising market and also the higher paper costs that Susan talked about earlier and we've talked about before, which, at a full year level, impacted the whole business by about EUR 15 million, the little bit more than half of that impacting Media Finland. On the other and elimination side, we saw lower personnel expenses due to the adjustments to the long-term and short-term incentive provisions. And looking forward to 2023, we will see those costs -- that cost will increase as we go back to more normalized bonus provisions. Looking at the net debt chart. You can see on the top right, the net debt over adjusted EBITDA was at 3.2, above last year, primarily due to the acquisition late in 2022 but coming down. And as Susan mentioned, the long-term target of being below 3 is still very much in place. Our interest-bearing net debt was at EUR 823 million, again, higher due to the loan related to the acquisition, and our equity ratio was at 35.8% at year-end, which is within the long-term range of 35% to 45%, albeit at the lower end. In terms of net financial expenses, we are seeing increases here due to the interest rates. So Q4 amounted to EUR 6 million, considerably above last year, with the higher debt levels and the interest rate increase and the full year increase to EUR 13 million. In 2023, we do expect a significant increase of that, with the higher interest rates we saw at the back end of the year continuing in 2023. And to emphasize again, the larger scale of the learning business, with inflation, with these high financial expenses will mean that our quarters are a bit more seasonally expanded, if you like. So the Q1 will be more negative with the increased business and then offset by higher performance in Q3. So the quarters will become more emphasized, the seasonality. Moving to the free cash flow and showing again the slide that Susan showed on the right-hand side, the buildup from 2022 free cash flow going from EBITDA all the way to the total. The total on right of EUR 112 million included this significant one-off impact from acquiring the Italian businesses, Italian and German business, due to the timing. So we bought it at the end of August and, therefore, had the business, and in learning businesses, a lot of money goes out. The first half of the year comes in the second half. And so we had that impact in our numbers, which we have excluded for the purpose of the dividend calculation. But looking at the movement, so 2022, significantly down last year, mainly due to the investments we're doing in the business. So lower EBITDA, which includes the transaction and integration costs related to the acquisition, higher investments in learning content, higher working capital with a buildup in inventory, particularly in Spain, with the LOMLOE curriculum change, but also longer payment terms and the timing of collections in Southern Europe and Spain and Italy. We also saw higher CapEx with the investment in our digital platform harmonization but also office adaptation coming out the ways of working changes coming out of COVID. And finally, higher taxes paid because we pay taxes in '22 for the '21 results, which were stronger. On this slide, I show that the normal free cash flow by quarter slide on the right. But focusing on 2023 and connected with what Susan was talking about in 2023, we do expect a lower cash flow in 2023 versus the full number of EUR 111 million shown in the previous slide but about in line with the adjusted -- the underlying cash flow. And so whilst we'll see improvements in working capital as the timing impacts of 2022 reversed in 2023, we do see the lower EBITDA in Media Finland, the integration project costs of the Italian business, the continued thoughtful investments in the business development and the digital platforms and the higher financial expenses that I mentioned. And all this will have then a normalized operating cash flow of the acquired Italian and German businesses versus the one-off impact we saw in 2022. Here, you have your information, the time line for the financial reporting. And with that, we will move on to the Q&A part of the presentation.

Thank you, Alex. Thank you, Susan. And as promised, we will now hand over to the telephone line for any questions. Please, operator.

[Operator Instructions] The next question comes from Maria Wikstrom from SEB.

Yes. I actually have 3 questions. So the first one is relating to the guidance range, so the EUR 150 million to EUR 180 million. So if you could discuss about the uncertainties which contribute to a quite wide range that we are currently having here.

Yes. The range is, as you indicate, wider. I think the economic environment, the uncertainties that are laid within that, they give rise to a bit wider range than you would normally see. We do think that over time and for us, that will mean after the third quarter, when we have had the high season in Learning, we will be able to narrow that range. But most likely not much earlier. If you think about where these uncertainties are, then they are, of course, predominantly on the media side to see how the market responds but, at the same time, also the expenses and then particularly on the personnel expenses side where the different negotiations will land in the different territories.

Okay. And then my second question is on the -- more on the leverage given that you ended up in a net debt/EBITDA of 3.2. So I would be interesting to know that you have a covenant on the current debt and then more of the structure of the debt. So how much of the debt is tied to the variable rates and how much is fixed?

Yes. So we do have covenants on the debt, but we don't disclose them publicly. And in the appendix to this deck, you see a breakdown of the debt into the different parts. You see there's a bond, which has a fixed sort of low interest rate. And then you can see the other loans that we relate to the acquisitions together with the element of it, which is in commercial papers. And so as the term loans for the acquisitions were related to the variable rates, but you can see, on that slide, the breakdowns.

Okay. I'll revert back to that. And then the final question is that you said that your digital subscriptions have been performing well, I guess, I mean, on cost of the print subscription. So obviously, the sales component is smaller with the digital subscription. But if we talk about the absolute EBIT, what is an impact if a person changes from a print subscription to pure digital?

Yes. We have indicated that change to be a 50% higher EBIT in absolute terms for an incremental user in digital. And that, of course, assumes that the changes are going to be modest during the years as we have seen and as we have also seen in 2022. So you -- you're absolutely right that the revenue is typically about half of what's in digital versus in print, but the -- there is a 50% uplift in profitability for a digital subscriber because that is -- just to elaborate on that, it is just a fixed-cost business in digital, where in the print, of course, you need to print and, particularly in Finland, high cost of distribution.

And just to be 100% clear, that this 50% incremental, that's on absolute level, not on a percentage.

No, no, no. On an absolute level.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you. And maybe at this point, I would like to ask the audience. We have a small group of people who have survived the storm here at Sanoma House. So if anyone has any questions from here, we have a few from the chat still, but giving the opportunity, please? Yes, use the microphone, please.

[ Sam Willumsen ] from Nordea Credit Research. I could go back to the leverage levels because what we've seen here, first of all, you're guiding lower margins for this year for obvious reasons. Your leverage has been above your long-term target since last summer. The dividend payout has been from, the last fiscal year, above your dividend policy now. It was 93% of free cash flow, if I remember. And your equity ratio was in lower limit of your policy. So that might raise a concern that what is your commitment to the targets relating to the capital structure because -- yes, because, for example, we understand that, of course, it might take some while, for example, for the leverage to come down. But is this something that you're expecting to fixed by itself with new acquisitions, which are also expected to increase the net leverage? Or is there like any measures that you are able or planning order to quickly, like, for example, fix the leverage situation? Or are you just waiting it to -- I wouldn't like to say that fixed itself but if you understand what I mean.

I understand. And maybe I start answering it. Then I hand to Alex. I think the waiting for it fixing ourselves is not our attitude. So I would say we will work hard to make sure that the cash flow from the business improves this. Of course, there is, with the investment levels that we are committed and keen to do to make sure that we have our long-term business, the full benefits. It might take a bit of time. But we are in a strong position, I think, also with strong sponsors, both on the banking and on the shareholder side. So yes, we are going to work hard on that. I don't believe, generally speaking, in growing yourself out of troubles. So I don't believe that you should now sort of increase at high speed all at once in investments. We're on a solid path. We want to do M&A. Only very selective M&A, we will do while we have limited headroom. Improve the business. We have done quite some acquisitions in the last years. There is still quite some work and some improvements and some scale benefits to be gotten. So we see good opportunities to work hard and bring the leverage and the other financial targets, all within line. So...

Perhaps 100% agree to that. I mean that's totally aligned.

Well, yes. Well, just a quick elaboration on that, that if, for example, it's due to the improved cash flow, which you're expecting to be weak next year. So if I'm reading correctly that you are, for example, comfortable of running the leverage above your target for the next 4 quarters, for example, but you're more looking on the long term.